Insurance Contracts, journey so far
Ind AS transition for insurance entities/ contracts
Effective date – 01 April 2024
Uniqus point of view:
- The MCA via notification no. G.S.R. 492(E) has amended the Companies (Indian Accounting Standard) Rules, 2015 and introduced the new Ind AS 117, Insurance Contracts (notification dated 12 Aug 2024)
- However, the roadmap for implementation of Ind AS is awaited from IRDAI
- Although insurance companies have not yet transitioned to Ind AS, as their roadmap will be finalized separately by IRDAI, those preparing Ind AS for consolidation purposes by their non- insurance parent or investor will need to apply Ind AS 117
- Additionally, companies that were previously applying Ind AS 104 to their guarantee and other insurance contracts will now need to apply Ind AS 117
Early adoption
Uniqus point of view:
- For insurance entities, earlier adoption is permitted only for consolidation purposes by its parent company
- Insurance companies with non-banking parents have the option to adopt Ind AS 117 early. However, once IRDAI issues guidance on Ind AS 117, these companies may need to maintain two sets of financial statements, i.e., one for the parent company’s consolidation results / financial statements and another for their own statutory reporting, in case the forthcoming IRDAI guidance has any accounting related impacts
- Insurance companies with banking parents may be unable to adopt the Ind AS framework early, as the Reserve Bank of India (RBI) has not yet applied Ind AS to banking entities. Currently, banks prepare their financial statements under IGAAP, and the RBI has not provided a timeline for the implementation of Ind AS
Initial application of Ind AS 117 and Ind AS 109
Uniqus point of view:
- The introduction of a new classification overlay method will enhance comparability for financial assets derecognized before the date of initial application, requiring relatively lower effort
Date of initial application (‘DIA’) and Date of transition (‘DOT’)
Uniqus point of view:
- The date of initial application is the beginning of the annual reporting period in which an entity first applies Ind AS 117
- The transition date is the beginning of the annual reporting period immediately preceding the date of initial application
Key Highlights of Ind AS 117 for Insurance entities
- New measurement models for insurance contracts: General Measurement Model, Premium Allocation Approach and Variable Fee Approach
- Contracts are segregated into cohorts: Profitable and non-profitable (onerous). Upfront recognition of contracts that are identified as onerous at the initial recognition
- Combination and separation of components from an insurance contract
- Incorporating risk-adjustment for non-financial risk and time value of money to discount the cash- flows
- Separate category of insurance results and service expenses are presented in the Profit and Loss with finance income and expenses being presented separately
- Better comparability of insurance companies due to enhanced level of disclosure requirements
Indian GAAP vs Ind AS 117
Ind AS 109 transition approaches
Ind AS 117 for non-insurers
The new insurance standard, Ind AS 117 Insurance Contracts, will apply for all companies, not just insurers. This is because it applies to contracts, regardless of the issuer.
This requires an assessment of the contracts / arrangements to evaluate whether the contract issued is an insurance contract under Ind AS 117. Certain type on contracts which require such evaluation include:
- Guarantees between group companies – e.g., parent and subsidiary
- Performance guarantees
- Other financial guarantees
- Mobile device replacement contracts
- Product or extended warranties
- Loan contracts e.g., with waiver on deaths
Ind AS 117 applies only to insurance contracts issued and reinsurance contracts held. It does not apply to insurance contracts held
Next steps
For insurers
Impact assessment: Given the effective date of 1 April 2024, insurance entities that have not yet started the impact assessment (i.e., comparing the existing Indian GAAP framework with the new Ind AS 117) should begin this process immediately. This assessment will require timely collaboration between the actuarial, finance, IT, and operations teams.
Systems, processes and internal controls: To be able to produce audited Ind AS financial statements on a BAU basis, systems, processes, and internal controls will need to be robust. Accordingly, insurance entities might have to evaluate investment in suitable IT infrastructure or modify existing systems as well as develop the internal control framework to address the risks arising from the new / enhanced actuarial processes to quantify the insurance liability as per Ind AS 117
Skills enhancements / people upgrade: Working on actuarial modelling, under new measurement models under Ind AS 117, will be an area in which Insurance entities will need to focus. This may entail additional training for existing personnel and onboarding of new personnel with the required skill sets
Effective governance and control framework: There should be a robust governance process in place to manage the transition and related reporting requirements. For instance, management will need additional data points across areas like actuarial liabilities and investments. Many of these data points may not have been previously tracked or subject to the rigor associated with an audit. Appropriate governance and controls will need to be institutionalized to make a meaningful transition to Ind AS 117
For non-insurers
Existing contracts: Identify whether you have existing contracts that might meet the definition of an insurance contract
Accounting policy/ elections: Consider whether you need to make any elections when deciding how to account for those contracts
Systems, processes and internal controls: Assess whether there are accounting implications under Ind AS 117 for any new contracts. Evaluate whether you have the appropriate systems, processes and controls in in place
